Startups take hit as venture capital slows to 1995 levels

Venture capitalists invested less money in US startups in the fourth quarter and showed signs of spreading out those fewer dollars among more companies, according to a new report.

VCs spent only $17.7 billion on 2,795 different deals last year, according to a report by PricewaterhouseCoopers and the National Venture Capital Association (NVCA). The figure represents the lowest dollar amount and number of investments since 1997.

The venture capital industry had no choice but to slow the investment pace in 2009, said Mark Heesen, president of the NVCA, in a statement.

The weak exit environment resulting from an unstable public market combined with a challenged limited partner base sent a strong message to the venture community to pull back the reins -- and the VC's listened.

The shaky economy has meant that startups are less likely to find buyers or complete initial public offerings. Venture capitalists, in turn, are making less investments.

Investments dropped by 13 percent to 794 startups during the quarter, although gained 15 percent from the summer, meaning that on average, each company is getting a smaller share of a smaller pie.

Declines hit a variety of segments where including software, biotechnology, and clean technologies.

Investments in biotechnology fell by 19 percent in both dollars and the number of deals. But biotech was the strongest sector of 2009, generating $3.5 billion in 406 separate investments, and growing 10 percent in investment dollars .

Investments in companies whose business models depend mainly on the Web remained flat, with $908 million in fourth-quarter investments.

Now that the economy has begun to show signs of improvement, we expect to see dollars flow more freely back into those sectors that offered the most promise before the recession began--clean technology, life sciences and IT, said Heesen.